Great Lakes Dredge & Dock CORP Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Great Lakes Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Tina Baginskis. Please go ahead.

Thank you. Good morning and welcome to our quarterly conference call. Joining me on the call this morning is our President and Chief Executive Officer, Lasse Petterson; and our Chief Financial Officer, Mark Marinko. Lasse will provide an update on the events of the quarter, then Mark will continue with an update on our financial results for the quarter. Lasse will conclude with an update on the outlook for the business and market. Following their comments, there will be an opportunity for questions.

Thank you, Tina. In the first half of 2021, our operations saw a substantial impact as a result of the COVID-19 pandemic. As the third wave of the pandemic spread through our population, we started to see significant additional direct costs and operational interruptions in the first quarter of 2021. Several of our vessel crews were infected despite extensive testing and isolation protocols. In order to mitigate continued outbreaks, in the second quarter, we initiated an extensive vaccination effort of our crews and staff as vaccines became available and set an ambitious target to have a majority of our employees vaccinated by the end of the quarter. Thus far, we have been successful, and our company-wide vaccination currently stands at 71% of our staff being fully vaccinated or partially vaccinated. We are now implementing new protocols, including requiring all new projects to have 100% vaccination prior to startup and all vessels coming back into operations from drydocks to have 100% vaccinated crews. Additionally, we require proof of vaccination to access any of our main offices. Unfortunately, vaccines were not readily available until later in Q2. Hence, we continue to incur COVID-related costs and experienced increased operational challenges on several projects during the second quarter of this year. The direct COVID costs of at-home and on-site testing, disinfecting of vessels, and the cost of quarantine affected crew and bringing replacement crews were $4.3 million in the first quarter with an additional $3 million incurred in the second quarter. Direct costs can be easily tracked, but the impact on projects and operational performance related to COVID was not as easily quantified but could be seen in lower-than-expected margins on several jobs. The majority of the projects worst affected are now completed, which included an international project, two Coastal Beach projects in the Southeast, one Beach project in the Northeast, and one capital project in the Gulf of Mexico. We expect to see positive effects of our vaccination initiative with reduced corporate impacts on our operation in the remainder of the year. We ended the quarter with adjusted EBITDA of $20.2 million and net income of $2.1 million. Our first half of 2021 results did not meet expectations due to the COVID impacts and related project performance mentioned.

Great. Thank you, Lasse. I will start with the quarterly results and then discuss some specifics related to our dredging business. For the second quarter of 2021, revenues were $169.9 million, net income was $2.1 million, and adjusted EBITDA was $20.2 million. Total company revenues for the second quarter of 2021 represented a $2 million or 1.2% increase compared to the second quarter of 2020. The increase was caused by higher domestic capital and Rivers and Lakes revenue, offset partially by lower maintenance, coastal protection, and foreign revenue. Gross profit was $22.9 million compared to $33 million in the second quarter of 2020. Gross profit margin was 13.5% compared to 19.7% in the prior year quarter. Direct COVID-19 costs had an unfavorable impact of $3 million on gross profit during the second quarter, and related productivity impacts and delays affected several projects. As stated previously, the majority of those projects affected have now been completed. During the second quarter of 2021, we had the New York, Alaska, Texas, Liberty, and Terrapin in drydock. All vessels, except the Terrapin, are returning to work in the third quarter. Total company operating income was $8.8 million, which is a decrease of $9.5 million over the prior year quarter. The decrease is a direct result of lower gross margin. General and administrative expenses were slightly lower than the prior year by $0.6 million. Net income for the second quarter of 2021 was $2.1 million compared to $9 million in the prior year quarter. The current quarter income includes net interest expense of $6.7 million and income tax expense of $0.8 million. Income for the second quarter of 2020 included $6.7 million in net interest expense and $3.1 million income tax expense. Approximately $1 million of extinguishment of sub-debt is included in the interest expense for the current quarter, which is related to the refinancing of our senior notes. Adjusted EBITDA for the second quarter of 2021 was $20.2 million compared to adjusted EBITDA of $28.1 million in the second quarter of 2020. Next, we turn to our balance sheet, where at June 30, 2021, we had $180.8 million in cash. During the second quarter of 2021, we continued to maintain a $0 cash balance on revolver. Our capital expenditure for the second quarter of 2021 was $27.5 million, which included $8.1 million related to the construction of the new midsize hopper dredge and $5.4 million for the build of the new multi-cat vessels and $0.6 million related to the design of the rock installation vessel.

Thank you, Mark. As we and our country are still facing the continued challenges and impacts of COVID-19, the dredging industry, deemed an essential service, has continued to execute critical and needed infrastructure projects. The U.S. Army Corps of Engineers has continued to follow their bid schedule and prioritize all types of dredging, including port deepenings, port maintenance and expansion, and coastal protection and restoration projects. In 2020, the domestic market reached €1.8 billion in project bids, and we are confident that the 2021 domestic market will remain as strong as 2020, driven by work that will include large-scale port deepening projects along the East and the Gulf Coasts. We expect that 2021 will see bids for multi-project phases for port deepening projects in Corpus Christi, Norfolk, Freeport, and Houston in the Houston Ship Channel that will continue for the next several years. In addition, our nation's coasts are subject to climate change, increasing severe weather events, and sea level rise, which results in an increase in beach erosion and other damage that adds to the recurring nature of our business and the need for more frequent coastal protection and port maintenance projects. In the second quarter, Great Lakes announced awards of $112.8 million of new work that adds to our 2021 backlog, resulting in a 34.5% market share for the first half of 2021. Backlog at June 30, 2021, was $454.4 million versus $423.4 million in June of last year. After the second quarter end, we were awarded the Cape May Beach Renourishment Project for $12.1 million, and we were the low bidder on the Thimble Shoal deepening and renourishment projects for $39.5 million. On July 30, Great Lakes were the successful low bidder on the Corpus Christi Phase III Deepening Project at $152 million, which will commence in late Q4 of this year. Our confidence in the market is reinforced by the support that we have seen for the dredging industry in the U.S. Army Corps of Engineers 2021 budget that was approved at another record high level. In July of this year, the House of Representatives approved the proposed broad budget for 2022 that is slated to be $8.66 million, which is an 11% increase over this year's levels.

Your first question comes from the line of Adam Thalhimer with Thompson Davis.

Can you give us an idea of what you mean by Q3 and Q4 being up year-over-year? How significant do you expect that increase to be?

Yes, of course. As we look ahead, when we file the Q later this week, you'll see that about 93% of our backlog as of June will be recognized as revenue for the remainder of this year, which amounts to over $400 million. We expect the gross profit margin percentage for Q3 and Q4 to be similar to what we achieved in the full year of 2020. This is largely due to a significantly lower number of vessels in drydock in Q3 and Q4 compared to Q1 and Q2. We do anticipate that general and administrative expenses will be somewhat higher in the latter half of the year, driven by increased activity as well as some expenses related to BCG. Specifically regarding drydock days, we expect Q3's drydock days to be less than half of what we had in Q2, with almost no drydock days in Q4. Therefore, we expect Q4 to perform better than Q3.

Okay. That's great information. Regarding the four boats returning in the latter half of the year, could you provide some insight into what types of projects those boats will be involved in?

I need to look up some additional details on that. However, we are continuing our port deepenings across the board. While there won't be much activity internationally, domestically we have ongoing port deepenings and beach projects planned for Q3. It's really focused on cross-border efforts and maintenance.

Mark Marinko: So the core bidding at this point, we expect it to be close to where it has been in the last couple of years with the exception of, I would add, with this infrastructure bill that could increase it from this kind of $1.8 billion that we've seen for the last 3 or 4 years. So that would be the piece that could increase. But it's too early to tell when those types of infrastructure build projects for our industry, the timing of those, it's too early.

Your next question comes from the line of Jonathan Tanwanteng with CJS Securities.

I was wondering if you could give us any insight as to how much lingering COVID impacting expense there might be in Q3, if you're seeing that extending into July, especially with these rates going up across the country?

Yes. Before the Delta variant emerged, we anticipated $4 million in the first quarter, $3 million in the second quarter, and projected around $2 million for the third quarter. We'll need to monitor how the new Delta variant affects our expectations. Currently, we still expect $2 million. We are closely watching the situation to see how it unfolds.

Got it. And were there any delays or stoppages or interruptions as a result in the last month?

In the last month, we haven't had any vessels stopped or taken in because of this variant.

I understand. That’s great news. I was curious about your win rate in the bid market during the first half. I see it was lower than usual, both from a total market perspective and at 35% compared to your normal 40% win rate. I'm interested in your thoughts for the remainder of the year regarding your opportunities out there and the types of projects you are best positioned for.

Yes, that's a great question. The good news is that post-June 30, we were the low bidder on Thimble Shoals. We also recently became the low bidder on Corpus, which is a significant $152 million project, and on Freeport deepening for about $72 million, although we were above the government estimate for that one. If awarded, these three bids would add $264 million to our backlog, which is substantial. We talked about our plans for the second half of the year, where we expect to bid approximately $1.1 billion following the $700 million in bids made in the first half. To reach a backlog similar to the end of 2020, we need to win about 45% of the upcoming bids. We're off to a strong start with these three bids, and the upcoming projects seem well aligned with our capabilities. It's shaping up to be a great start to the latter half of the year.

Got it. And then just any update on the LNG projects that you've been awarded but aren't in backlog yet. Are they moving forward? How should we think of those in terms of impact of this year or next year? And if there's been any progress?

Yes. The smaller of the two projects we anticipated at the beginning of this year won't start this year, but it is still progressing. They have acquired land to relocate roads in order to work on the site. I was informed yesterday that they are beginning to sign revenue contracts, which may lead to a notice to proceed in 2022. However, there are still a few final hurdles to overcome, but there is some positive momentum. The larger project is still further away, but the smaller one we signed earlier is hopefully getting closer.

Yes. I'd like to add, Mark. The client is now saying that they have secured contracts for the two initial trains at the LNG facility, which means they can have Bechtel start construction early next year, according to their estimates.

Got it. And just quickly on the BCG engagement that you were talking about. What's the additional cost from that, number one? And kind of what really is the opportunities for expanding the business beyond the 1 or 2, I guess, foundation vessels you're thinking about?

Yes. I'll start off with that, and Mark can fill in. We looked at the offshore wind market now for the last 2 years. And as the opportunities in that market are being crystallized and we stop bidding work, we wanted to have an independent and joint with us, review of the opportunities in the offshore wind market and what that represents to us. So we have gone through an extensive analysis of the opportunity that is there for the rock placement for the foundations and also other related activities that are close to our competencies and ability to perform. As you know, we had BCG engaged some 4 years ago to do the restructuring that we did, and they helped us out very successfully, and we decided to reengage with them to do this analysis. And I must say that I'm very optimistic about the opportunities that this, let's say, industry is presenting to us going forward.

Yes. So just on the specifics related to the cost, it's less than $2 million. As I mentioned earlier, that's going to push our G&A up in the second half a little bit versus the first half. But yes, very excited about as they confirm what we're looking at in offshore wind is also kind of reaffirming and relooking at our other investments we're making in the dredging business as we look forward on a longer-term basis.

Your next question comes from the line of DeForest Hinman with Wal Halston & Company.

Just clarity further on the outlook for offshore wind. Are we looking at other vessels, cranes, service vessels, or this is more along the lines of just confirming thoughts around potentially doing another rock vessel?

I think we can clarify that we won't be entering the installation vessel market for cranes. However, there are numerous opportunities for rock installation. Our investment decision for the first vessel was based on reaching a target of 10 gigawatts of installed power generating capacity by 2030. Since last year, the bid administrations have increased that target threefold. We will face supply chain challenges that may affect our ability to meet this target, but we see strong potential for more than one offshore rock installation vessel, and we're actively exploring that. Additionally, there are various services that can be conducted underwater, which align with our company's expertise, presenting further investment prospects in this new market segment. Nonetheless, I want to emphasize that creating an offshore lifting installation vessel requires a substantial investment that we are not pursuing.

Okay. Can you provide an update on the Army Corps bid market? Are there any private market bids on projects we are involved in that we should know about?

Well, the private market bids that we do have in the low bid, not awarded category, are for LNG developments. So those projects are significant. And based upon the final investment decisions by the clients, these projects could come to fruition in 2022 and 2023. Mark, I don't think we have other projects that are currently slated in that category.

That's correct. It's really just those two on the private side, yes, those two are in low bid pending award at this point, not in our backlog. That's correct.

Okay. Very helpful. And I've been asking this forever. I can't talk about it anymore, but you've got the debt refinanced. Can you just give us a refresh in terms of capital allocation priorities, and we're spending a lot of money on new vessels and potentially more money on new vessels. Can you give us a rundown there? Where does that pay down fall in from a priority perspective, dividends, and potentially stock repurchases?

Yes, I'll address that, Lasse. Nothing has changed significantly, so let me provide an update. We are currently constructing a midsized hopper dredge, which will cost $35 million this year, $45 million next year, and an additional $5 million in 2023. We are also building two smaller multi cats to improve the efficiency and safety of our pipeline work, totaling about $26 million, with $18 million allocated this year. After these projects, our focus will shift to an offshore wind vessel. While we have not yet finalized the pricing, we estimate it will be between $175 million and $200 million. This vessel will be comparable in size to the Ellis Island. These plans remain consistent with our previous discussions. Looking ahead, we are in discussions with BCG regarding our dredging options, considering whether to pursue a carbon copy of the hopper dredges or to explore a cutter dredge. We will wait until next summer to make a decision on that. Additionally, we are assessing whether to invest further in the offshore wind sector, either in a second offshore wind vessel or alternatives. Currently, we are analyzing these opportunities. Regarding share repurchase, like last year, Lasse and the Board are supportive of initiating a program if we determine the stock is undervalued, similar to what we did last year. We will monitor this situation and be prepared to act when the opportunity arises.

And the last part of the question was the dividend?

Yes. So I would say of all those priorities, dividends are probably the last of those priorities related to what we do have to do to obviously focus on growing the business and then the share repurchase was fairly effective last year. And so I would say it's of the priorities, it's definitely something we consider just in the priority, let's say probably tell you it's at the latter of all those other priorities.

Okay. Very helpful. Can you clarify regarding the option on the hopper dredge? If we exercise that option, is it a fixed price, or does the price reflect the current market conditions regarding steel, which has increased significantly?

Yes. When we pursue these options, you receive a lower price, approximately $4 million less than the one we are currently developing. However, steel prices are variable. If steel prices exceed the range specified in that contract, costs could increase. Currently, steel prices have stabilized, so we will need to monitor the market next summer to see how it affects us. However, I don't anticipate it being significantly impactful based on our current position.

Okay. Perfect. And then last question. Just help us understand the decision on the rock dumping vessel as it relates to this financing that's out there. You did reference it in your press release, but just being very specific on this, would we be willing to make an investment decision on the rock vessel without potential favorable financing through the DOE? Or is it possible that that financing could come into play after we make an investment decision, kind of a weird question, but can you just help us understand that?

So we have the ability, looking at capital allocation, looking at the cash flow that we've been able to generate, that we can do these items I've talked about, including the offshore wind vessel, off our current balance sheet. I don't necessarily need to take on new debt. If we did add additional items, then I would or could. So at this point, I don't have to if we stick to kind of what we're committed to. I don't take on any more debt. But yes, we have, like I said earlier in the last call, we've had conversations with the Department of Energy. And that's attractive financing, and it looks like it could be, we would take advantage of that.

Do we have any understanding of what that cost might be?

Yes, it’s a floating rate that is determined by your credit rating. Essentially, it’s LIBOR plus a certain amount, and based on your credit rating, it would be in the vicinity of 3% today.

Your next question comes from the line of Poe Fratt with Noble Capital Markets.

First thing is, Mark, you mentioned the Freeport, it sounds like you're a little bit pending award on Freeport, but you're above the core's estimate. Can you give some color on that? I think you said it might be $50 million if you look at sort of the awards that you included in the press release?

Freeport was about $73 million, actually. But again, we're above the government estimate. So we're presently working with them to see if we can make that awardable.

How much above the estimate were you?

I'm going to say about, I want to say $15 million, but that number, I don't recall of that, something like that.

Okay. Like 25% above their estimate, roughly.

Yes.

And then typically, you give the low bid pending award number you referred to it a couple of times, but I didn't hear an actual number.

Oh, sure, it's $447 million.

Okay. And then just to confirm, it sounds like you're not seeing any indication that the U.S. Army Corp. engineers is point forward any projects based on increased funding.

I'm sorry, can you repeat that? Poe, sorry.

Are you seeing any indication that with the core's budget potentially going up that they're preparing to pull forward any projects? And put them out to bid sooner than what you have anticipated?

No, I wouldn't say there's anything earlier yet. We're entering a very active bidding season for the third and fourth quarters, and those bids have been established for some time. So, nothing has changed at this moment. Any impact would likely be felt more in early 2022. Currently, the bidding market is set for the fiscal year, which ends in September, so everything is fixed for this year. Any changes would come later, but I haven't seen any indications of that yet.

Yes. I mean, I guess my point would be, I mean, my view has always been that the core's budget has not been the issue. It win more of the pipeline and their ability to handle schedule in few projects. And so it maybe extends the fairway a lot longer, but it doesn't really impact the bid market year-to-year in that materially?

Yes. We haven't noticed any slowdown in the Army Corp bids. Everything has been pretty much as we anticipated. I understand your concern; while it's still too early to determine the outcome since the bills need to be passed and completed, I don't believe it will overwhelm the Army Corp. They have managed everything so far, and these are significant projects they want to finish, so I see it as a positive development.

Yes. And Houston has been out on the horizon as far as a pretty significant project. Can you give us an update on any timing that you're seeing from the standpoint of the Houston project, the ship channel?

Yes. I can take that last.

Okay.

So we have the first level. First, bidding of that's coming up in August, potentially in the range of $100 million.

Okay. Great. And then, Mark, you highlighted that $175 million to $200 million for the cost of the rock dumping charge. Would that be mainly 2022 and 2023 CapEx? Or would you see as you hit that investment decision more in '21?

Yes. There is a potential that we could, looking at the market and when we'll kind of tie to time it with the market, right? When do we think these projects will commence? And when will that vessel have to be ready? So there is a potential that we could have the first payment this year. If we make the decision to do the investment that be kind of near the end of this year based on being ready in 2024. So that just have to continue to gauge the market of when they're going to need that ready to do the construction.

Yes. Mark, the projects that we are bidding today are having offshore construction seasons starting in 2024. And in order to meet those deliveries, we will have to make our investment decision as early as Q3 this year.

Okay. And maybe I should have asked, could you give us a 2021 full year CapEx number, hopper dredges, the first hopper boards is $35 million, the multi cats $18 million. Can you round out the CapEx numbers for '21?

Certainly. We're looking at around $35 million for the new hopper, $18 million for the multi cats, and $2 million for the design of the offshore wind vessel, along with approximately $35 million in regular capital expenditures to maintain our fleet. We've also conducted a couple of lease buyouts related to these capital expenditures. If you check the cash flow statement, you'll find the relevant cues, which amount to about $16 million for the first half of this year. In total, we're in the vicinity of $100 million, not including what Lasse mentioned regarding the potential decision to start construction on the offshore wind vessel.

Would the estimate for the deposit moving forward be about 10% of the project cost, or would it be higher?

Now, I don't think it would be higher than that. It could be, if you think about the hopper dredge we're building, it was about 10%. So yes, it could be, but I don't think it will be higher. I think it would be around 10% or maybe a little less.

Okay, great. Lastly, I wanted to ask about the stock buyback. I understand you haven't revisited it yet, but could you clarify what your thoughts were on when the last stock buyback occurred, particularly regarding what you considered undervalued? Any insights you could share on when a stock buyback might be initiated would be appreciated.

Yes, we found ourselves in a different situation in September of last year when the stock was around $8.63 at the time of our call with the Board. We're currently not close to that figure. While I don't have a preliminary estimate, I can say it would be higher, but I can't specify a number just yet. I want to emphasize that the Board has been very supportive, and Lasse is in favor of reinstating a new buyback if necessary due to our stock being undervalued. This decision will depend on our future market outlook, our performance, and the stock price at that time.

Yes, this is a very old case. Approximately six years ago, a subcontractor damaged a pipeline, leading to a spill. We have engaged in numerous discussions with the client and authorities regarding liability. We believe we are not directly responsible for the spill as it was caused by a subcontractor. However, this case has been prolonged, consuming substantial resources and management time. Therefore, this year, we concluded it would be more beneficial for the company to accept a minor plea and move forward. We agreed to pay a fine of $1 million in conjunction with the guilty plea, and we have set aside $2 million, which will be determined by the outcome of the civil trial related to this matter. If we prevail in proving we are not responsible for the spill, the $2 million would not be considered an expense for us.

Great. And then, Mark, if any of that's been recognized, was the fine recognized in the second quarter? And I guess, this simple question will be recognized in first and second quarter?

Yes, we actually recognized that in the first quarter, so there wasn't an impact on the P&L. The $2 million that has been set aside is classified as restricted cash and has not affected the P&L at this time. We also expect that insurance will cover this amount if restitution is awarded to the plaintiffs.

There are no further questions. I would now like to hand the call over to Tina Baginskis.

Thank you. We appreciate the support of our shareholders, employees, and business partners, and we thank you for joining us in this discussion about the important developments and initiatives in our business. We look forward to speaking with you during our next earnings discussion. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect at this time.